Incentivising Suppliers to be Innovative in Sourcing Exercises

Incentivising Suppliers to be Innovative in Sourcing Exercises

Henry Ford famously once said that if he had asked people what they wanted, they would have said faster horses. He was a classic example of an innovator that was thinking outside of the box and delivering something that exceeded customer expectations. A procurement strategy that embraces innovative thinking needs to make allowances for creativity and this article explores two mechanisms for improving sourcing performance.

During procurement strategy planning, Lot Design (breaking demand into atomic units) and specifications of precise requirements invariably curtail innovation and creativity. This can be counter productive and as suppliers have the most up to date and current knowledge about their industry. It can also be frustrating for potential suppliers when buying organisations are overly prescriptive and suppliers are not given sufficient freedom of expression to describe innovations or efficiencies.

The key change required to facilitate creativity is by giving suppliers freedom of expression in competitive tenders. Suppliers have varying strengths and weakness across a buyers demand profile. They have individual preferences about certain aspects of the good or service being procured, that can fit well together and offer cost synergies that are not clear to the buyer. The may also have ideas about combining certain contracts to achieve synergies or leverage recent technological advances .

Improve Communication through Richer Bidding

The first act of value destruction, Lot design, partitions a subset of the good or service being procured and forces suppliers to supply all or none of each lot. It usually destroys value because some suppliers may like to secure a subset of that lot as the following example illustrates. It is preferable to disaggregate demand into as many small contracts as makes sense and invite suppliers to conduct the ‘Lotting’ or packaging with contingent discounts.

To design a smarter competition – so that Lot Design no longer harms value, package bidding (eliciting bids on bundles of lots) must be permitted. If the purchaser keeps contracts (or line items) granular, then simply allowing market participants to communicate their preferred combinations unlocks fantastic value. This drives competitiveness because more suppliers are free to describe exactly the manner in which they would prefer to conduct business with the purchaser so that waste and inefficiency is removed.

Incentives for Expressive Structured Bidding

The next key challenge is to facilitate innovation and alternative product/service delivery models. This is more challenging as it may be prudent to restrict the options to a discrete number of delivery option that are chosen via a pre-qualification scheme. By inviting variant bids, you can allow suppliers to price alternative options and decide as a buyer post event what option presents best value for money. The incentives for suppliers naturally exist in a setting where innovation can permit greater efficiency. When a buyer is leverage a sourcing optimization tool to calculate the optimal way to combine complex offers, suppliers know it is in their interest to offer richer options and strive for efficiencies.

Software Tools to Accelerate Analysis

Additional information ordinarily present greater overheads but if the above data is captured via a sourcing optimization then one-click-evaluation can make Scenario Analysis much faster. Keelvar’s solution facilitates this richer bid gathering so that information related to cost efficiencies are collected. The reason buyers are not doing this already is that the winner determination problem can become impossibly complex when many package bids are received from numerous suppliers. Keelvar’s procurement software has cracked this nut and in doing so it facilitates richer communication of creative and innovative offerings.